Disasters, Household Decisions, and Insurance Mechanisms: A Review of Evidence and a Case Study from a Developing Country in Asia

• DOI: http://doi.org/10.1111/aepr.12154
• Published date: 01 January 2017
• Date: 01 January 2017

Disasters, Household Decisions, and Insurance

Mechanisms: A Review of Evidence and a Case

Study from a Developing Country in Asia

Yasuyuki SAWADA†

Universityof Tokyo

This articleinvestigates whether and howAsian people’s exposure to a varietyof disasters undermine

their decisionsand welfare. Our case studyfrom Vietnam, based onhousehold panel data, showsthat

households adopt a variety of coping strategies against the damages caused by disasters especially

through credit and labormarkets. While the consumption risk sharing networks functioneffectively

at the commune level, market and non-market insurance mechanisms are not sufficient, especially

at the regional, national, and international levels. Hence, it is imperative to strengthen market,

government, and community based insurance mechanisms to diversify aggregate disaster risks at

the individual, national, and regionallevels in Asia.

Key words: consumption risksharing, insurance, manmadedisasters, natural disasters,poverty

JEL codes: D80, G22, I3, O1

1. Introduction

In the last few decades, the Asian region has continuously achieved remarkable economic

development. The region’s real gross domestic product (GDP) inpurchasing power parity

(PPP) termsincreased from about $3.3 trillionin 1980 to an estimated $24.5 trillionin 2009,

a 7.5 times increase, compared with thethree times increase for the worldeconomy during

the same period (Lee & Hong, 2012). A question needing to be answered is whether this

rapid economicgrowth can be continuedin the coming decades. In answeringthis question,

a number of challenges for Asia have beenlisted in the literature (Stiglitz& Yusuf, 2001; Lee

& Hong, 2012).Among the challenges, this paperconsiders disasters, definedas unforeseen

This paperwas prepared for the TwentyThird AEPR Conference on “Labor,Health and Education in

Asia - Analysis of Micro Data,”held in Tokyo on 9 April 2016. The author would like to thank the

designated discussants Euston Quah and Keijiro Otsuka, conference organizers Takatoshi Ito,

KazumasaIwata, Jong-Wha Lee, ColinMcKenzie, and Shujiro Urata,and the conference participants,

particularly Chalongphob Sussangkarn, Hall Hill, Rana Hasan, and Albert Park for their useful

comments. This study utilizes empirical results based on the micro data collected for the Project

“Post-disaster Recovery Policies and Insurance Mechanisms against Disasters: Case studies on

earthquakes in Japan and floods in Thailand”undertaken at Research Institute of Economy, Trade

and Industry (RIETI). The usual disclaimersapply.

†Correspondence: Yasuyuki Sawada, Faculty of Economics, University of Tokyo, 7-3-1 Hongo,

Bunkyo-ku, Tokyo 113-0033, Japan. Email: sawada@e.u-tokyo.ac. jp

doi: 10.1111/aepr.12154 Asian EconomicPolicy Review (2017) 12, 18–40

18 ©2017 JapanCenter for EconomicResearch

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negative events that overwhelm local capacity, necessitating external assistance, due to the

following two concerns. First, Asia is the continent most prone to natural disasters

in the world (Guha-Sapir et al., 2015): from 2004 to 2013, Asia experienced 44.4%

of the world’s disasters and accounted for 80.7% of the worldwide reported disaster

victims. Furthermore, it suffered damages of $US 752.7 billion with 46.3% of the

reported worldwide natural disasters costs. Second, while Asia was the first region

in the world weathered by the global financial crisis of 2008-2009, the region has

experienced rapid credit growth, enhancing the potential risk of financial crises in

the future (Asian Development Bank, 2015). From 2009 to 2013, proliferating bank

loans and bonds in 14 large developing Asian economies almost doubled total

domestic debt, from $US 18.3 trillion to $US 34.1 trillion. While credit expansion

fuels growth, excessive debt exposes economies to financial crises, necessitating macro

prudential policies to mitigate such risks.

In this paper, we examine whether and how Asia’s exposure to a variety of disasters

undermines people’s decisions.

1

A disaster can generate direct economic losses to the

economy. If market and non-market insurance mechanisms are not sufficient, Asia’s

development and poverty reduction trends could wane. After reviewing Asia’s exposure

to disasters in section 2, we examine the effectiveness of different market and non-

market insurance channels based on case studies from Asia, and especially Vietnam, in

section 3. Then, section 6 investigates the overall effectiveness of consumption insurance

against disasters at the international, national, and community levels in Asia. In the

final section, we discuss some policy implications based on the empirical evidence

presented in the paper.

2. Disasters in Asia

Even though Asian economies have been growing steadily, there are serious potential

risks in sustainable growth, such as catastrophic disasters (Aldrich et al., 2014).

Natural and man-made disasters show distinct rising trends across the globe: natural

and technological disasters have been increasing more rapidly, in terms of national

average disaster occurrence per year, than financial crises and violence-related disasters

(Cavallo and Noy, 2011; Kellenberg and Mobarak, 2011; Strömberg, 2007). More

precisely, disasters can be classified into four major groups (Sawada, 2007). The first

type are natural disasters, which comprise hydrological disasters (floods),

meteorological disasters (storms or typhoons), climatological disasters (droughts),

geophysical disasters (earthquakes, tsunamis, and volcanic eruptions), and biological

disasters (epidemics and insect infestations). The second type of disasters are

technological disasters (that is, industrial accidents (chemical spills, collapses of

industrial infrastructure) and transport accidents (by air, rail, road or water

transport)). The final two types of disasters are manmade, including economic crises

(hyperinflation, banking crisis, and currency crisis) and violence (terrorism, civil strife,

riots, and war).

Yasuyuki Sawada Disastersand Households: A Review and A Case

©2017 JapanCenter for EconomicResearch 19